Manufacturing strategy at Rolls Royce

When you say “Rolls Royce” to most people they think of fancy cars and, depending on their age, Grey Poupon ads. There is, of course, another side of Rolls Royce that has long made jet engines and other industrial strength sources of power. The industrial side of Rolls was separated from the automotive side decades ago and since the auto brand has been swallowed up by BMW, it is the heavy equipment Rolls Royce that survives as an independent firm.

And it is an independent firm that has marched to its own drummer. As the Wall Street Journal reports (Rolls-Royce Powers Ahead in High-Wage Countries, Oct 20), Rolls has persisted in having its operations in places with high wage rates. The figure at right tells the story. Rolls workforce is skewed to locations like the UK (not to surprising), Germany, the US and Norway (?!) where labor is pricy. The company is currently expanding in Asia but in Singapore and not, say, China and Vietnam.

The following video tells the story with an emphasis on Rolls’ maritime business in Norway.

Vodpod videos no longer available.

So how is Rolls making this work? To some extent they are following a playbook similar to other manufacturers in the West: Substitute capital for labor and rely on advance technology to offer distinct products. The firm then needs few workers (relative to the value they create) and can then afford to pay them well. (See, for example, here for more along these lines.)

As touched on in the video, there is a hitch. You may not need an army of workers, but you need highly skilled workers and those can be hard to come by.

Rolls is betting that its brains can match the brawn of lower-cost competitors. But the engine maker’s aggressive expansion faces a growing threat. It is struggling to secure enough highly skilled employees. Even paying lavishly, Rolls battles for talent against employers ranging from banks to software companies, many of which pay even better. And in many developed countries, it also faces a shrinking pool of science, engineering and math students pursuing technical careers. In Alesund, Rolls has been forced to offer perks like free sailing lessons to retain workers plus relocate staffers from other countries to fill technical positions.

Those forces could undermine Rolls’s ability to keep jobs close to home. Of more than 6,000 recent applicants at its nuclear-power division in the U.S. and Britain, for example, less than 10% had appropriate backgrounds to merit even an interview, officials say. “The skills we need to build our business just aren’t there in the breadth and depth we need,” said Ken Fulton, human resource director for Rolls’s nuclear unit.

In response, Rolls is training hundreds of apprentices annually and has partnered with 28 universities world-wide. It is also opening far-flung facilities, such as a new factory in Singapore, where Rolls for years has maintained jet engines. …

Developing skills while containing cost “is walking a tightrope,” said Chief Executive John Rishton in a recent interview. “We wrestle with those issues all the time.”

At the same time, many of Rolls’ competitors (like GE) are investing heavily in China, Brazil, and other developing countries (see also our discussion of Bombardier in Mexico).

So is Rolls’ strategy sustainable? It’s an interesting question. As the article points out, one factor in its favor is that high wage nations are also pretty good at protecting intellectual property rights. Norway may not be cheap but the government is just happy to have the jobs and is not going to insists on transferring technology to a local champion. It is also not clear how the labor story plays out in the long run. Yes, India and China can turn out a lot of engineers but the best of them will have the same opportunities as engineers in, say, the US where banks are happy to hire them or, if they really like engineering for the sake of engineering, finding the right start up can be more rewarding than working for an industrial giant.

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